<A> WSJ: Telecommunications: Bypassing The Bells: Changing Picture: Cable-TV
Companies Are At Last Starting To Push Into The Phone Business
By Leslie Cauley
Staff Reporter of The Wall Street Journal
After years of false starts and dashed hopes, cable companies are finally
plugging into the phone business.
It always seemed like a natural fit: Cable companies have networks of
wires going into people's homes. With upgrading, those wires can transmit
telephone calls -- local and long-distance -- as well as interactive video,
Internet access and high-speed data services.
But upgrading cable networks proved a nightmare of soaring expenses and
technical hassles, and cable companies retreated from their early grand
plans for local phone competition. For years, they have been silent as
long-distance firms have taken their place as combatants in the local-phone
battle.
Now a handful of cable-TV companies are quietly pressing ahead with plans
to offer competing phone services in a few pockets around the country,
luring customers with a discounted package of local, long-distance, cable-TV
and Internet services. And, in some cases, they're undercutting the local
Bell's prices by 60% or more.
"We think it's an attractive business proposition," says Joseph Cece,
senior vice president of strategic planning for Cablevision Systems Corp.,
Woodbury, N.Y., which currently provides service to about 1,000 businesses
and 1,000 homes on Long Island.
Other cable companies making a push into phone service include Cox
Communications Inc., based in Atlanta, and MediaOne Group, the former cable
arm of U S West Inc., the Denver-based Bell. Cox currently offers phone
service to about 50,000 of its cable-TV customers in Orange County, Calif.,
and about 10% have signed up. MediaOne, recently spun off from U S West, has
introduced phone service in Atlanta, Los Angeles, Jacksonville and Pompano,
Fla., and, most recently, Boston. It says early results are encouraging.
The idea of cable companies morphing into phone companies recently got a
big shot in the arm when AT&T Corp. announced plans to acquire
Tele-Communications Inc., with an eye on using TCI's cable-TV lines to
muscle its way into the local phone business. By going that route, New
York-based AT&T hopes to bust into the market aggressively, while also
avoiding paying the Bells billions of dollars in access fees to originate
and terminate AT&T calls.
The audacious gamble drew gasps from some longtime AT&T watchers -- and
applause from the cable-TV industry, which viewed the deal as a strong
endorsement of the power and potential of cable lines in the new digital
world. "In many ways, it validates what we are doing," says Charles McElroy,
Cox's vice president of phone service.
Cable's push into the local phone market comes after years of promises to
take on the Bells in their home telephone turf: The industry's infatuation
with phone service was ignited in the early 1990s, when the Baby Bells,
flush with excitement following Bell Atlantic Corp.'s bid to buy TCI a la
AT&T, vowed to offer competing cable-TV services. Cable-TV companies,
alarmed at the prospect of having to do battle with seven well-financed
rivals, responded by threatening to offer competing phone services. For
several years, the two sides argued about who would have an edge in the new
digital world, with each claiming that it could use its network to zap all
manner of new digital fare to consumers, including interactive TV, Internet
access and phone service.
Congress, sniffing a consumer bonanza afoot (read: price wars), passed
legislation aimed at fanning the flames of that rivalry. The
Telecommunications Act of 1996 encouraged local, long-distance and cable-TV
companies to invade one another's markets, erasing regulatory boundaries
that had kept them separate for years. Lawmakers looked to cable companies,
with their direct links into America's homes, to lead the charge on the
Bells, reasoning that others would soon follow.
But that didn't happen. By the time the new bill was signed into law, in
February 1996, the Bell Atlantic-TCI deal was history, and the Bells were
having serious questions about the financial wisdom of spending billions to
upgrade their networks to handle video, a market that some Bells regarded as
peripheral at best. After a few high-profile stumbles in video, the Bells
instead set their sights on the long-distance market, regarded as much
easier prey, given the architecture of their century-old networks.
With the competitive heat off, most cable companies went back to tending
their core video operations and mostly forgot about offering competing phone
services.
A lot of cable companies hadn't been all that thrilled about taking on the
Bells anyway, because of the huge expense involved: Traditional cable
networks were designed to zap movies from cable "head-ends," where videos
are electronically stored and distributed, to customers' homes -- but with
no reverse path, which is essential for phone service. Likewise, cable-TV
billing systems weren't designed to track telephone calls, which can vary
wildly in cost depending on destination and time of day, necessitating other
expensive upgrades. A host of other technical issues, such as how to power
telephones, which work off independent power sources (so they don't go out
during power outages) only added to the expense.
AT&T's splashy entry into the cable world is helping to refocus attention
on the whole cable-phone approach, leading some cable companies that had
abandoned the idea to take a second look.
Cablevision was an early proponent of a cable-phone strategy. The company
started offering some limited phone services to business customers in 1994,
when most states still didn't allow anybody to compete with the local Bell.
New York, in the forefront on deregulation, has allowed such competition for
years.
To go after business customers, Cablevision extended its cable network to
industrial parks and business centers, places where most cable lines don't
run. The new cable-TV lines were connected to Cablevision's backbone
network, a fiber line that runs throughout Long Island and connects its
cable head-ends. From there, the new lines had to be connected to the local
phone network of Nynex Corp., which has since been merged into Bell
Atlantic, so that people could call anywhere they wanted.
To gear up, Cablevision installed its own computerized phone switches, set
up separate customer-service centers and hired dozens of workers with
expertise in telephone installations and the like. Many of the new hires
were former employees of Nynex, which was then in the process of
restructuring to get rid of thousands of employees. The timing, for
Cablevision, couldn't have been better. "Their downsizing created an
opportunity for us," recalls Mr. Cece, the company's strategy chief.
Today, four years after that grand experiment began, Cablevision considers
phone service a certified hit: The company currently provides phone service
to more than 1,000 businesses -- including major hospitals and financial
institutions -- throughout Long Island, over more than 30,000
Cablevision-branded telephone lines.
Given its successful run with commercial customers, the decision to enter
the residential phone market was an easy one, Mr. Cece says.
Cablevision, which began its move into the residential market last year,
today offers phone service to about 6,000 customers in neighborhoods
scattered throughout Long Island, and almost 1,000 homes have signed up. The
company says it plans to make the service available to about 50,000
residential customers by year's end, with an eye on eventually offering it
to all four million of its potential customers in the New York area.
By the end of this year, Cablevision expects to generate close to $50
million in revenue from phone service -- a small chunk of Cablevision's
annual revenue, which totaled about $1.9 billion in 1997. But given the
ever-improving prospects for cable-phone service, Mr. Cece believes it will
turn into an increasingly important part of Cablevision's businesss over the
long haul.
Cablevision is luring customers with a discounted package of local,
long-distance, cable-TV and Internet-access services. Under one plan,
customers can call throughout Long Island without incurring toll charges.
(Bell Atlantic splits the island up into three calling areas and charges
extra for calls that cross those boundaries, but it also offers several
flat-rate plans for Long Island and greater New York.) Under another
Cablevision plan, customers can pay $6 a month for a phone line, and get a
second phone line free. (Bell Atlantic charges a flat $6.60 per line.) Or
customers can buy services a la carte to create their own calling plan,
paying prices that are generally 10% to 70% cheaper than Bell Atlantic's own
a la carte rates. Cablevision can afford to charge less because, unlike Bell
Atlantic, it doesn't have to serve the entire region, including unprofitable
areas and difficult-to-serve neighborhoods.
For customers, potential savings abound: One sample plan offers one phone
line, a choice of three calling features, such as call forwarding, call
waiting and caller ID, and long-distance calls for 13 cents a minute. Total
cost: $12.10 with Cablevision, compared with $15.35 with Bell Atlantic
(which doesn't offer long distance), a 27% discount. (Neither price includes
a monthly $3.50 subscriber-line charge mandated by the Federal
Communications Commission.)
Cablevision also offers discounts of 10% to 30% off its core cable
services to customers who sign up for phone service: The more customers
spend on phone services, the deeper the discounts. Customers who spend at
least $25 in a month get 10% of their phone bill -- $2.50 in the case of a
$25 phone expenditure -- knocked off their cable-TV bill. Spend $250 on
phone service, and get 30% of your phone bill taken off cable. Discounts cap
out at around $90, equivalent to a free month of premium cable service.
Bell Atlantic at the moment isn't allowed to offer long distance, part of
a federal ban on all the Bells until they can show that enough local phone
competition has developed to warrant letting them into long distance. But
Bell Atlantic is inching closer: It recently received clearance from New
York regulators to offer long distance, paving the way for the company to
get federal approval. Once that happens, Bell Atlantic says, it will finally
be on an equal footing with Cablevision and other rivals, which don't have
any limits on the services they can offer.
In the meantime, Bell Atlantic is offering deep discounts on some consumer
services: One new plan, called Value Pack, lets customers pick as many as 13
special services, such as call waiting and caller ID, for $17.99 a month,
compared with its a la carte pricing of $3 to $5.19 apiece. Under another
service, called Weekend Choice, Bell Atlantic customers pay $4.95 a month to
be able to place in-state toll calls for eight cents a minute regardless of
their destination. Regular in-state toll calls, by comparison, can cost as
much as 15 cents a minute.
Later this year, Bell Atlantic also plans to begin reselling the video
services of DirecTV, the satellite-television broadcaster, throughout New
York. Bell Atlantic recently began offering the services of DirecTV, which
offers dozens of channels and pay-per-view events, in a few other markets,
and early response has been encouraging. Bruce Gordon, a group president for
Bell Atlantic, says the company eventually plans to bundle all of its
services -- local, long distance, video, Internet access and cellular -- in
one package.
Once that happens, Mr. Gordon argues that Bell Atlantic "will be at parity
in terms of the products in our bundle, but still superior to the
competition" insofar as its upgraded phone network is concerned. He also
contends that Bell Atlantic's long history in offering phone service will
play to its advantage once phone competition heats up.
As for Cablevision, Mr. Gordon says Bell Atlantic is mindful of the
potential threat it poses, but not particularly worried at the moment. "They
are a force to be reckoned with, but their evolution in the consumer market
is early on," he says, noting that Cablevision hasn't yet "captured enough
of a customer base to be a nose-to-nose competitor."
But that seems to matter little to the likes of William Wladyka, who
dumped Bell Atlantic about six months ago to give Cablevision a try.
Mr. Wladyka and his wife are consultants who work out of their Nassau
County, N.Y., home. He says they rack up major time on the phone calling
around Long Island and into New York City. As such, he says, they were
attracted by Cablevision's promises of big savings.
So far, things are working out: Since switching to Cablevision's phone
service, Mr. Wladyka says, their monthly phone bill has been cut in half.
Asked if he misses anything about his longtime phone provider, Bell
Atlantic, Mr. Wladyka doesn't hesitate: "Not one thing," he says, especially
"the high bills."
---
Ms. Cauley is a staff reporter in The Wall Street Journal's New York
bureau.
---
Package Deals
Major cable companies offering residential phone service
Company: Cablevision Systems Corp.
Where: Long Island, N.Y.
First Offered*: September 1997
Company: Comcast Corp.
Where: West Palm Beach and Fort Lauderdale, Fla; Baltimore
First Offered*: November 1997
Company: Cox Communications Inc.
Where: Phoenix; San Diego and Orange County, Calif.; Hartford, Conn.; Omaha,
Neb.; Hampton Roads, Va.
First Offered*: September 1997
Company: Jones Intercable Inc.
Where: Prince George's County, Md.; Alexandria, Va.
First Offered*: July 1996
Company: MediaOne Group
Where: Los Angeles; Jacksonville and Pompano, Fla.; Atlanta; Boston suburbs
First Offered*: January 1998
Company: Rifkin & Associates
Where: Atlanta; Miami Beach, Fla.
First Offered*: November 1996
Company: Tele-Communications Inc.
Where: Hartford, Conn.; Arlington Heights, Ill.
First Offered*: October 1996
Company: Time Warner Inc.
Where: Rochester, N.Y.
First Offered*: September 1995
*The month each company first offered residential phone service anywhere.
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